With or without surprise, the cost of living (COLA) continues to be on the rise. For business owners and employers alike, navigating through the choppy waters of employee retention and satisfaction while balancing the need to maintain profitability may be on the horizon.
To review, a COLA increase is an increase in income or benefits to keep up with rising prices (also known as inflation), and was enacted by legislation in 1973. COLAs allow people to continue to afford goods and services, housing, and taxes as prices go up. Companies often use COLAs to:
- Ensure competitive salaries to attract good employees.
- Help employees relocate to an area with a higher cost of living.
- Increase retirement benefits and other benefits.
The government often applies an annual COLA to Social Security benefits to guard against inflation. For tax year 2023, the projected increase in the cost-of-living adjustment is 8.7%, meaning both Social Security cost-of-living adjustments (Social Security COLA) benefits and federal Supplemental Security Income payment levels will increase by 8.7%.
COLAs also affect the maximum reimbursement amounts permissible for certain employee benefits.
So, whether you’re a seasoned business owner, or a first-time employer, continue reading for an overview of the various methods for calculating COLAs, as well as the adjustments to employee benefits for 2023.
How COLAs Are Calculated
Cost-of-living adjustments can be calculated in a few different ways:
- Consumer price index (CPI). Companies often use CPI to adjust salaries during inflation. CPI is calculated by the Bureau of Labor Statistics (BLS) based on a list of consumer goods and services that the average household uses and the average prices of those items. The BLS calculates CPI each month and for the year — both on a national basis as well as regionally for the South, West, Midwest, and Northeast. Some consider the CPI to be the most accurate cost-of-living calculation.
- Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The Social Security Administration (SSA) uses CPI-W to adjust Social Security and Supplemental Security Income (SSI) for inflation. The BLS calculates CPI-W by using the same method for calculating CPI, except it looks at the average change over time in the prices of that same list of consumer goods and services that are paid for specifically by clerical workers and urban wage earners.
- Consumer Price Index for All Urban Consumers (CPI-U). This is a measurement of the average change in the prices of consumer goods and services over time and includes a broader category of demographics than the CPI-W — extending to retirees, self-employed professionals, technical workers, and temporary workers.
This Year’s COLA Adjustments & Thresholds
On October 18, 2022, the IRS announced the tax year 2023 annual inflation rate adjustments for various benefits. They are as follows:
Health Flexible Spending Accounts (FSAs)
For 2023, the dollar limit on employee salary reduction contributions to health FSAs is $3,050 (up from last year’s cost of $2,850). Additionally, 2023 health FSAs may permit a maximum rollover of up to $610 into the following plan year (up from $570).
Qualified Transportation Fringe Benefits
For 2023, the monthly limit on the amount that may be excluded from an employee’s income for qualified parking benefits is increasing to $300 (up from $280). The combined monthly limit for transit passes and commuter vehicle expenses for 2023 will also be $300 (up from $280).
Qualified Small Employer Health Reimbursement Accounts (QSEHRAs)
For 2023, the maximum amount of payments and reimbursements under a QSEHRA can’t exceed $5,850 for individual coverage and $11,800 for family coverage (up from $5,450 and $11,050, respectively).
Small Business Health Care Tax Credit
For 2023, the average annual wage level at which the tax credit begins to phase out for eligible small employers is $30,700 (up from $28,700).
Dependent Care Assistance Program (DCAP)
The $5,000/$2,500 DCAP limit has not changed for calendar year 2023 (as it is a non-indexed limit). There is no annual increase, as the increased limit to $10,500 for calendar year 2021 (under the American Rescue Plan Act of 2021) will not apply to 2023 or future years.
Health Savings Accounts (HSAs)
The limits for health savings accounts (HSAs) for 2023 were announced earlier this year. The annual contribution limit for individual coverage is increasing by $200, for a total of $3,850. The annual contribution limit for family coverage is increasing by $450, for a total of $7,750. The catch-up contribution limit for those aged 55 and older will remain at $1,000.
Get the Right Guidance
It’s important to apply annual cost-of-living increases for employee benefit amounts accurately and determine any other impact these adjustments may have on your business. Partnering with an HR solutions provider can help you get the guidance you need, and help ensure you’re prepared for the next year. A partner can also help you avoid certain compliance issues, like ERISA penalties.
PrimePay can partner with you to administer pre-tax benefits for your company, no matter the size or choice of plan.
Learn more about how PrimePay can help you offer consumer-driven health plans to your employees.
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